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Downing Inc VCT3 (DI3O)

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Wednesday 24 July, 2013

Downing Inc VCT3

Downing Income VCT 3 plc : Final Results

Downing Income VCT 3 plc : Final Results

Downing Income VCT 3 plc
Final results for the year ended 31 March 2013

FINANCIAL SUMMARY

ORDINARY SHARE POOL

2013
Pence
2012
Pence
Net asset value per share ("NAV") 89.5 87.0
Cumulative distributions paid since 1 April 2010 17.1 12.1
Total return (net asset value plus cumulative distributions paid) 106.6 99.1

'E' SHARE POOL

2013
Pence
2012
Pence
Net asset value per share ("NAV") 89.4 94.4
Cumulative distributions paid since launch 5.0 -
Total return (net asset value plus cumulative distributions paid) 94.4 94.4

CHAIRMAN'S STATEMENT

I am pleased to present the Annual Report and Accounts for the year to 31 March 2013. It was a busy year for your Company, with the 'D' shares being converted into Ordinary Shares, a new 'E' share class launched, and a share realisation and reinvestment scheme being undertaken which completed shortly after the year end.

The Company was also busy in terms of investment activity as opportunities were taken within the Ordinary Share pool to reduce a number of AIM holdings and complete some new unquoted investments, while the 'E' Share pool made a good start in investing its funds, mostly in unquoted businesses. The Ordinary Share pool returned a solid performance for the year and there was no movement in the NAV of the 'E' Share pool, which is still at an early stage in its life.

'E' Share Fundraising
The 'E' Share fundraising closed on 5 September 2012 having raised gross proceeds of £5.8 million. Although the level of funds raised is a little lower than originally hoped, the larger size of the Company is still beneficial to all Shareholders in spreading the burden of fixed running costs.

'D' Share conversion
Having paid dividends totalling 30.0p per 'D' Share, in accordance with the plans set out at their launch, the 'D' Shares were converted into Ordinary Shares on 7 September 2012 based on the relative net asset value at 31 August 2012. 'D' Shareholders received 0.58164 Ordinary Shares for each 'D' Share held.

In order to facilitate the conversion, and ensure that the nominal share capital was maintained, the Ordinary Shares were subject to a bonus issue and share consolidation. The end result is that the nominal value of each Ordinary Share, which was 1p, is now 3.037p. This has had no impact on the net asset value of each Ordinary Share and share certificates showing "Ordinary Shares of 1p each" continue to remain valid.

The results in this report for the Ordinary Share pool include both those of the original Ordinary Share pool and the 'D' Share pool.

Share Realisation and Reinvestment Programme ("SRRP")
As Shareholders will be aware, the Company launched a Share Realisation and Reinvestment Programme ("SRRP") in February 2013. This completed shortly after the year end and was well received by investors with 2.1 million shares being tendered. The shares were purchased on 4 April 2013 and 11 April 2013 at 87.9p per share and the proceeds reinvested in new shares issued at approximately 90.6p per share.

A further £181,000 was received in respect of the top-up share offer that was launched alongside the SRRP, with shares being issued on the 4 April 2013 and 11 April 2013 at the same price.

Investment activities and performance
Ordinary Share pool
At 31 March 2013, the Ordinary Share portfolio comprised 32 investments, which were valued at just over £11 million and was split 42:58 by value between quoted and unquoted investments. The portfolio benefited from particularly strong performances by two AIM-quoted holdings, Pennant and Tracsis, and generated net unrealised gains of £799,000 and net realised losses of £24,000 over the year.

Further details on the investment activities and performance are given in the Investment Manager's Report for the Ordinary Share pool.

'E' Share pool
During the year the 'E' Share pool made six qualifying investments at a total cost of £1.7 million. The share pool also took advantage of a number of non-qualifying opportunities which, in most cases, are in the form of short term secured loans which will provide the share pool with an attractive yield on funds before they are employed in qualifying investments.

There was only one valuation movement during the year being of one AIM-quoted investment, Universe Group plc, such that the portfolio generated net unrealised gains of £55,000.

Further details on the investment activities and performance are given in the Investment Manager's Report for the 'E' share pool.

Net asset value
Ordinary Shares
At the year end, the NAV per Ordinary Share stood at 89.5p. This represents an increase of 7.5p (5.9%) over the year after adding back dividends of 5.0p paid during the year.

'E' Shares
At the year end, the 'E' Share NAV stood at 89.4p. This represents no change to the NAV over the year after adding back dividends of 5.0p paid during the year.

Results
The total return on ordinary activities for the year was as follows:

RevenueCapitalTotal
£'000£'000£'000
Ordinary Shares 161 573 734
'E' Shares (1) (1) (2)
160 572 732

Dividends
In line with the Company's stated policies, the Board is proposing to pay the following final dividends on 30 September 2013 to Shareholders on the register at 6 September 2013, as follows:

Ordinary Shares   2.5p per share
'E' Shares   2.5p per share

The payment of dividends is subject to Shareholder approval at the Annual General Meeting ("AGM") on 17 September 2013.

Share buybacks
The Company operates a general policy of purchasing its own shares that become available in the market. The Company's current policy is to buy any Ordinary Shares at approximately a 15% discount to the latest published NAV and any 'E' Shares at a nil discount as indicated in the 'E' Share prospectus. Buybacks are subject to regulatory restrictions and other factors such as availability of liquid funds.

During the year, the Company repurchased 412,871 Ordinary Shares for an aggregate consideration of 73.4p per share; 30,825 'D' Shares for an aggregate consideration of 46.0p per share; and 11,185 'E' Shares for an aggregate consideration of 89.0p per share. These shares were subsequently cancelled.

Annual General Meeting
The next AGM of the Company will be held at 10 Lower Grosvenor Place, London, SW1W 0EN at 11:30am on 17 September 2013.

One item of special business is proposed, a special resolution to renew the authority to allow the Company to make market purchases of the Company's shares.

Outlook
The Board is encouraged with the Company's performance over the last year and believes that the adjustments to strategy made at the time of the merger in 2010, namely a reduced level of exposure to AIM and a focus on AIM investments where the Manager holds a stake large enough to be influential, are now starting to provide benefits.  Over the next year, we expect to see the 'E' Share pool make further qualifying investments and, to a lesser extent the Ordinary Share pool, where funds for investment will come from proceeds of realisations of existing portfolio companies.

Although the economy remains fragile, there are now some early signs of optimism of recovery. The Manager will continue to work closely with all portfolio companies to ensure that they are able to take full advantage of improving conditions.

Longer term, with changes to the VCT regulation last year allowing VCTs to make larger qualifying investments, there is now a clear trend towards larger VCTs, which have several attractions, including reduced running costs on a per share basis. The Board is considering what options are available to the Company in this direction.

Andrew Griffiths
Chairman

INVESTMENT MANAGER'S REPORT - ORDINARY SHARE POOL

The Ordinary Share pool and 'D' Share pool merged on 31 August 2012 to create one share pool with net assets of approximately £11 million. This report covers activity across both pools over the year to 31 March 2013.

At the year end, the Ordinary Share Pool held 23 unquoted investments and nine quoted investments.   Investment activity during the year has continued to focus on the rebalancing of the inherited portfolio following the change of manager.  The Ordinary Share pool is effectively fully invested and therefore further investment activity will be limited to reinvesting proceeds from divestments when suitable opportunities arise.

Investment activity
Quoted investment activity
The Ordinary Share pool began the year with £4.6 million of quoted investments held in 12 companies. Over the year, the portfolio was rationalised further, consistent with the strategy to balance quoted investments with unquoted investments.  This is now largely complete and we will seek to add quoted holdings, on a case by case basis, when appropriate opportunities arise.  Over the period, £800,000 was raised from the quoted portfolio, divesting from three companies in their entirety and partially realising another five investments.

Significant sales included Synergy Healthcare plc (realising £216,000 of proceeds and profit of £79,000 on cost), Tracsis plc (where proceeds of £165,000 were realised with a profit of £95,000 on cost).  DODs Group plc and Sinclair IS Pharma plc positions were sold down in their entirety, reflecting our concerns about the future prospects for these companies. These holdings realised a loss against cost of £197,000 and £37,000 respectively.

No material new quoted investments were made during the year.

Unquoted investment activity
The Ordinary Share pool made seven unquoted investments during the year, five of which were new and two of which were follow-on investments.

The largest qualifying investment of £500,000 was made in Vulcan Renewables Limited. Vulcan is building an anaerobic digestion plant in Doncaster, which will produce both gas and electricity to be supplied to the National Grid. As a result, Vulcan will receive Feed-in-Tariff and Renewable Heat Incentive scheme payments.

£400,000 was invested in Baron House Developments LLP, a non-qualifying opportunity. The partnership is developing a new Hampton by Hilton Hotel in Newcastle. The investment attracts a fixed yield along with a share of the development profit.

A non-qualifying investment of £300,000 was made in Southampton Hotel Developments Limited which is developing a Hilton branded hotel and spa next to the Ageas Bowl cricket ground (formerly known as the Rosebowl) near Southampton.

A £100,000 investment was made in Mosaic Spa and Health Clubs Limited. Mosaic owns two freehold spa and health clubs, one in Shrewsbury and a second in Hereford. Mosaic also runs a spa and health club management company.

Investment performance
Overall, the portfolio increased in value by £799,000 over the year, comprising mainly of gains in the quoted portfolio.  This is a significant improvement on prior year and is reflective of the Manager's strategy to focus on fewer, larger quoted holdings over which the Manager can have a greater degree of understanding and influence.

Quoted investment performance
The holdings within the quoted portfolio experienced a gain in value of £803,000, equivalent to an uplift of 14.2%.

The largest gains were in Pennant International plc (which showed an increase of £823,000) and Tracsis plc (which showed an increase of £699,000 in addition to a £95,000 realised profit on sales).

Pennant International plc, now the Company's largest holding representing 12.1% of the pool, is an integrated logistics and support solutions business - mainly servicing the defence industries.  In the year, it announced its largest ever contract win representing £16 million of turnover over the next 5 years.  In the year to end of December 2012, it also announced a 40% increase in turnover and a doubling of pre-tax profits. We continue to monitor Pennant's progress and valuation; since the year end we have taken some profits in the holding to reduce the overall exposure in the share pool.

Tracsis plc, the provider of optimisation software for the transport sector, also experienced positive trading in the year. Its fully owned subsidiary MPEC, which provides monitoring solutions for rail infrastructure, has performed particularly, well reflecting the continued Government spend on the upgrading of the UK rail network.

Investment performance
Quoted investment performance (continued)
Tracsis plc increased in value by £699,000 to £1,136,000 from an initial cost of £282,000.  In addition, profits of £95,000 were taken on the sale of a portion of the holding.   We continue to believe in the long term prospects of Tracsis plc and monitor the valuation against the opportunities that we believe they can deliver for their shareholders.

Ludorum plc saw its valuation decline by £386,000 despite starting to become profitable in the year as merchandising income from "Chuggington", the children's animated TV show, continued to develop. We believe Ludorum still has good prospects, reflected in its positive ratings on Disney Channels and the BBC. Sales in the USA of its new product, Stacktrack (www.stackyourtrack.com) have been encouraging and we eagerly await the launch of this product in Europe which will coincide with the launch of Series 3 of Chuggington in the autumn.  The Company holds both loan stock and equity in Ludorum plc, which provides more investor rights (and a paid yield) than would normally be inferred with a straight equity investment.   We believe that the current share price does not yet reflect the intrinsic value of the "Chuggington" asset.

Elektron Technology plc experienced continued poor trading, due to challenging macro conditions and what, we believe is, a weak management team with poor financial discipline and corporate governance. Its value in the share pool decreased by £265,000 over the year.  Our lack of confidence in management to deliver the much needed turnaround in this company, combined with the fact that we believe the board is highly overpaid, has led us to exit from this holding after the year end.

Tristel plc, a manufacturer and distributor of disinfectants to hospitals and vet practices, saw its valuation fall by £84,000, reflecting a slow take up of some of its new products and declining profitability as it invested in its new production facilities.  Again our lack of confidence in the ability of management to implement a cost cutting exercise has led us to exit this legacy holding, in full, after the year end.

Unquoted investment
On a positive note, a number of small uplifts were recognised in the following unquoted investments: £60,000 in Domestic Solar Limited, £50,000 in Data Centre Response Limited, £29,000 in Leytonstone Pub Limited, £15,000 in Tramps Nightclub Limited and £11,000 in Kidspace Adventures Holdings Limited. All these investments are performing well and in line with expectations and uplifts at the year-end were supported by underlying trading.  

Real Time Logistic Solutions Limited, having previously been valued at £nil, was sold after the year end for £105,000, realising a book profit of £73,000.

The valuation of the investments in Cadbury House Holdings Limited, Hoole Hall Country Club Holdings Limited and Hoole Hall Spa and Leisure Club Limited were reduced by £119,000, £84,000 and £33,000 respectively at the year end as a result of indications that the market for such hotels has weakened recently and the fact that the companies have a relatively high level of prior ranking finance.

Camandale also experienced a reduction in its valuation of £39,000 after one of the two pubs owned by the company was transferred for £30,000 into a new investment, Kilmarnock Monkey Bar Limited. The new valuation of Camandale reflects the standalone valuation of the remaining pub, The Riverbank.

Net asset value, results and dividend
 
 

The Ordinary Share NAV increased by 5.9% over the year (after adjusting for the dividends paid during the year) and stood at 89.5p at 31 March 2013.

The return on ordinary activities after tax for the Ordinary Shares for the year was £734,000, comprising a revenue return of £161,000 and a capital return of £573,000.

The Board is proposing to pay a final dividend of 2.5p per Ordinary Share on 30 September 2013, subject to Shareholder approval at the forthcoming AGM, to Shareholders on the register at 6 September 2013.

Outlook
Although the macro economic climate is still challenging, particularly at Government and domestic levels, there is evidence that corporate balance sheets are in good shape, which could lead to further merger and acquisition activity in the quoted portfolio in the coming months.  Given that the portfolio is now largely fully invested, the focus will continue to be on rigorous portfolio management of the individual investments to optimize the capital growth and yield. This will enable continued dividend payments to Shareholders by the Company.  

Downing LLP

REVIEW OF INVESTMENTS - ORDINARY SHARE POOL

Portfolio of investments
The following investments, all of which are incorporated in England and Wales, were held at 31 March 2013:

CostValuationValuation movement
in year
% of
portfolio
by value
£'000£'000£'000
Top ten venture capital investments
Pennant International Group plc * 193 1,383 823 12.1%
Tracsis plc * 282 1,136 699 10.0%
Cadbury House Holdings Limited 1,134 976 (119) 8.6%
Ludorum plc * 1,254 774 (386) 6.8%
Accumuli plc * 400 724 46 6.4%
Leytonstone Pub Limited 582 611 29 5.4%
Domestic Solar Limited 500 560 60 4.9%
Vulcan Renewables Limited 500 500 - 4.4%
Aminghurst Limited 403 403 - 3.5%
Baron House Developments LLP 400 400 - 3.5%
5,648 7,467 1,152 65.6%
Other venture capital investments
Hoole Hall Country Club Holdings Limited 480 396 (84) 3.5%
Tramps Night Club Limited 295 326 15 2.9%
Elektron Technology plc * 530 319 (265) 2.8%
Southampton Hotel Developments Limited 300 300 - 2.6%
The 3D Pub Co Limited 383 268 - 2.4%
Hoole Hall Spa and Leisure Club Limited 300 267 (33) 2.4%
Kidspace Adventure Holdings Limited 250 261 11 2.3%
Future Biogas (SF) Limited 216 242 - 2.1%
SPC International Limited - 240 - 2.1%
Data Centre Response Limited 132 181 50 1.6%
Kidspace Adventures Limited 129 129 - 1.1%
Tristel plc * 325 126 (84) 1.1%
Real Time Logistic Solutions Limited 32 105 105 0.9%
Mosaic Spa and Health Clubs Limited 100 100 - 0.9%
Giving Limited 83 83 - 0.7%
Animalcare Group plc * 35 77 (28) 0.7%
Plastics Capital plc * 100 76 11 0.7%
Camandale Limited 364 40 (39) 0.3%
Kilmarnock Monkey Bar Limited 30 30 - 0.3%
EPI Service Limited 230 27 - 0.2%
Keycom plc ** 275 5 (12) -
The Thames Club Limited 225 - - -
4,814 3,598 (353) 31.6%
 
  10,462 11,065 799 97.2%
 
Cash at bank and in hand 320 2.8%
Total investments 11,385 100.0%

All venture capital investments are unquoted unless otherwise stated

*   Quoted on AIM  
**   Quoted on the ISDX Growth Market  

Investment movements for the year ended 31 March 2013

Additions

Non
QualifyingqualifyingTotal
 £'000£'000£'000
New investments
Baron House Developments LLP - 400 400
Kilmarnock Monkey Bar Limited - 30 30
Mosaic Spa and Health Clubs Limited 86 14 100
Southampton Hotel Developments Limited - 300 300
Vulcan Renewables Limited 500 - 500
  586 744 1,330
Follow-on investments
Aminghurst Limited - 14 14
Helcim Group Limited - 90 90
Tracsis plc - 1 1
Sundry - 1 1
- 106 106
586 850 1,436

Disposals

CostValue at 01/04/12ProceedsProfit/
(loss)
vs cost
Realised
gain/
(loss)
£'000

*

£'000
 
 
£'000£'000£'000
Market sales
Animal Care Group plc 4 13 11 7 (2)
DODs Group plc 270 67 73 (197) 6
Elektron Technology plc 20 22 12 (8) (10)
Pennant International Group plc 20 55 88 68 33
Sinclair IS Pharma plc 191 147 154 (37) 7
Synergy Healthcare plc 137 188 216 79 28
Tracsis plc 70 109 165 95 56
Tristel plc 150 125 81 (69) (44)
  862 726 800 (62) 74
Unquoted (including loan note redemptions)
Camandale Limited 32 31 22 (10) (9)
Data Centre Response Limited 20 20 20 - -
EPI Service Limited 15 4 4 (11) -
Helcim Group Limited 758 168 79 (679) (89)
Kidspace Adventures Limited 21 21 21 - -
Ludlow Taverns Springhill Limited 50 50 50 - -
Tramps Night Club Limited 15 15 15 - -
  911 309 211 (700) (98)
Total disposals 1,773 1,035 1,011 (762) (24)

* After adjusting for purchases in the year

INVESTMENT MANAGER'S REPORT - 'E' SHARE POOL

The 'E' Share pool completed fundraising during the period, raising net proceeds of approximately £5.5 million and the task of investing these funds is now well underway.

Investment activity
During the share pool's first period, £3.3 million was invested across 13 companies; six of the investments were VCT qualifying investments including one AIM-quoted investment. An overview of the largest investments made during the period is detailed below.

A £500,000 partially-qualifying investment was made in Mosaic Spa and Health Clubs Limited. Mosaic currently has approximately 30 management contracts to provide gym and spa management to hotels, universities and corporate clients and owns a freehold health club known near Shrewsbury. In October 2012, a second freehold club in Hereford, Holmer Park, was purchased by Mosaic.

Investments of £400,000 and £200,000 were made in Fresh Green Power Limited and Green Energy Production UK Limited respectively. Both companies own a portfolio of Photo-Voltaic solar panels installed on residential rooftops and consequently receive Feed-in Tariffs.

An investment of £300,000 was made in Vulcan Renewables Limited. Vulcan is building an anaerobic digestion plant in Doncaster, which will produce both gas and electricity to be supplied to the National Grid. As a result, Vulcan will receive Feed-in Tariff and Renewable Heat Incentive scheme payments.

In October 2012, a qualifying investment of £283,000 was made in Oak Grove Renewables Limited, which is developing a 2MW biogas plant in Norfolk. The plant will produce biogas through an anaerobic digestion process which is then used to generate electricity. Oak Grove Renewables will benefit from the receipt of Feed-in Tariffs for electricity generation.  

An investment of £106,000 was also made in AIM-quoted Universe Group plc in the form of equity shares and a £40,000 yielding loan note. Universe is a provider of point of sale payment and loyalty systems for the fuel industry.  

During the year, the share pool made £1.5 million of non-qualifying VCT investments, the largest of these being a £500,000 investment in Baron House Developments LLP, £270,000 in Hoole Hall Hotel Limited, £232,000 in West Tower Holdings Limited, £210,000 in Aminghurst Limited and £200,000 in Southampton Hotel Developments Limited. These investments are short-term loans and are made with the intention of the monies being repaid and invested into VCT qualifying investments in due course. These provide a significantly higher yield than holding funds as cash or deposits.  

Investment performance
As all the unquoted investments were made within the last 12 months and have performed to plan.  All were held at valuations equal to cost at the year end. The exception is Universe Group plc, where an increased share price has resulted in an uplift of £55,000.

Net asset value, results and dividend
The 'E' Share NAV was unchanged over the year (after adjusting for the dividends paid during the year) and stood at 89.4p at 31 March 2013.

The loss on ordinary activities after tax for the 'E' Shares for the period was £2,000, comprising a revenue loss of £1,000 and a capital loss of £1,000.

The Board is proposing to pay a final dividend of 2.5p per 'E' Share on 30 September 2013, subject to Shareholder approval at the forthcoming AGM, to Shareholders on the register at 6 September 2013.

Outlook
The 'E' Share pool has made good progress in employing funds in secured loans over the period whilst sourcing qualifying investments in a number of secure Government backed renewable energy investments. Dealflow of potential VCT qualifying investments for 2013/14 is looking promising, due to the continued lack of traditional sources of funding. This should provide the 'E' Share pool with the prospect of completing a number of new, good quality VCT qualifying investments over the next 12 months.

Downing LLP

REVIEW OF INVESTMENTS - 'E' SHARE POOL

Portfolio of investments
The following investments, all of which are incorporated in England and Wales, were held at 31 March 2013:

CostValuationValuation movement
in year
% of
portfolio
by value
£'000£'000£'000
Qualifying investments **
Mosaic Spa and Health Clubs Limited ** 500 500 - 9.6%
Fresh Green Power Limited 400 400 - 7.7%
Vulcan Renewables Limited 300 300 - 5.8%
Oak Grove Renewables Limited 283 283 - 5.5%
Green Energy Production UK Limited 200 200 - 3.9%
Universe Group plc * ** 106 161 55 3.1%
1,789 1,844 55 35.6%
Non-qualifying investments
Baron House Developments LLP 500 500 - 9.6%
Hoole Hall Hotel Limited 270 270 - 5.2%
West Tower Holdings Limited 232 232 - 4.5%
Aminghurst Limited 210 210 - 4.1%
Southampton Hotel Developments Limited 200 200 - 3.9%
The 3D Pub Co Limited 80 80 - 1.5%
Dominions House Limited 54 54 1.0%
1,546 1,546 - 29.8%
 
  3,335 3,390 55 65.4%
 
Cash at bank and in hand 1,796 34.6%
Total investments 5,186 100.0%

All venture capital investments are unquoted unless otherwise stated

*   Quoted on AIM  
**   includes partly non-qualifying investments

Investment movements for the year ended 31 March 2013

Additions

Non
QualifyingqualifyingTotal
 £'000£'000£'000
Aminghurst Limited - 210 210
Baron House Developments LLP - 500 500
Claireville St LLP - 500 500
Dominions House Limited - 54 54
Fresh Green Power Limited 400 - 400
Green Energy Production UK Limited 200 - 200
Hoole Hall Hotel Limited - 270 270
Mosaic Spa and Health Clubs Limited 430 70 500
Oak Grove Renewables Limited 283 - 283
Southampton Hotel Developments Limited - 200 200
The 3D Pub Co Limited - 80 80
Universe Group plc 105 1 106
Vulcan Renewables Limited 300 - 300
West Tower Holdings Limited - 300 300
  1,718 2,185 3,903

Disposals

Cost

*

Value at 01/04/12
 
 
ProceedsProfit/
(loss)
vs cost
Realised
gain/
(loss)
£'000£'000£'000£'000£'000
Claireville St LLP 500 500 500 - -
West Tower Holdings Limited 68 68 68 - -
568 568 568 - -

* After adjusting for purchases in the year

Statement of Directors' responsibilities
The Directors are responsible for preparing the Report of the Directors, the Directors' Remuneration Report, the Corporate Governance Statement and the financial statements in accordance with applicable law and regulations. They are also responsible for ensuring that the Annual Report includes information required by the Listing Rules of the Financial Conduct Authority.

Company law requires the Directors to prepare financial statements for each financial year. Under that law the Directors have elected to prepare the financial statements in accordance with United Kingdom Generally Accepted Accounting Practice (United Kingdom Accounting Standards and applicable law). Under company law, the Directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the state of affairs of the Company and of the profit and loss of the Company for that period.

In preparing these financial statements, the Directors are required to:

*        select suitable accounting policies and then apply them consistently;
*        make judgments and accounting estimates that are reasonable and prudent;
*        state whether applicable UK Accounting Standards have been followed, subject to any material departures disclosed and explained in the financial statements; and
*        prepare the financial statements on the going concern basis unless it is inappropriate to presume that the Company will continue in business.

The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Company's transactions and to disclose with reasonable accuracy at any time the financial position of the Company and to enable them to ensure that the financial statements and the Directors Remuneration Report comply with the Companies Act 2006. They are also responsible for safeguarding the assets of the Company and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities.

The Directors are responsible for the maintenance and integrity of the corporate and financial information included on the Company's website. Legislation in the United Kingdom governing the preparation and dissemination of the financial statements and other information included in annual reports may differ from legislation in other jurisdictions.

Statement as to disclosure of information to Auditor
The Directors in office at the date of the report have confirmed that, as far as they are aware, there is no relevant audit information of which the Auditor is unaware. Each of the Directors has confirmed that they have taken all the steps that they ought to have taken as Directors in order to make themselves aware of any relevant audit information and to establish that it has been communicated to the Auditor.

INCOME STATEMENT
for the year ended 31 March 2013

Company position

 20132012
 
 RevenueCapitalTotalRevenueCapitalTotal
  £'000£'000£'000£'000£'000£'000
 
Income   516 - 516 350 - 350
  

Gains/(losses) on investments

  - 830 830 - (1,850) (1,850)
 
  516 830 1,346 350 (1,850) (1,500)
 
Investment management fees   (69) (207) (276) (12) (35) (47)
 
Other expenses   (259) (79) (338) (191) (2) (193)
  

Return on ordinary activities before tax

  188 544 732 147 (1,887) (1,740)
 
Tax on ordinary activities   (28) 28 - - - -
 
Return attributable to equity shareholders  160 572 732 147 (1,887) (1,740)
 
Basic and diluted return 
Ordinary Share   1.4p 4.7p 6.1p 1.3p (14.2p) (12.9p)
'D' Share  N/A N/A N/A 0.1p (9.4p) (9.3p)
'E' Share  - - - - (0.1p) (0.1p)

All Revenue and Capital items in the above statement derive from continuing operations. No operations were acquired or discontinued during the year. The total column within the Income Statement represents the profit and loss account of the Company.

A Statement of Total Recognised Gains and Losses has not been prepared as all gains and losses are recognised in the Income Statement shown above.

Other than revaluation movements arising on investments held at fair value through the Income Statement, there were no differences between the return as stated above and at historical cost.

Split as:
Ordinary Shares (including 'D' Shares)

  20132012
  
  RevenueCapitalTotalRevenueCapitalTotal
  £'000£'000£'000£'000£'000£'000
Income   394 - 394 349 - 349

Gain/(losses) on investments

  - 775 775 - (1,850) (1,850)
 
394 775 1,169 349 (1,850) (1,501)
Investment management fees (48) (144) (192) (11) (33) (44)
Other expenses (164) (79) (243) (191) (2) (193)
Return on ordinary activities
before tax
182 552 734 147 (1,885) (1,738)
Tax on ordinary activities (21) 21 - - - -
Return attributable to equity shareholders 161 573 734 147 (1,885) (1,738)

'E' Shares

  20132012
  
  RevenueCapitalTotalRevenueCapitalTotal
  £'000£'000£'000£'000£'000£'000
Income 122 - 122 1 - 1
Gains on investments - 55 55 - - -
122 55 177 1 - 1
Investment management fees (21) (63) (84) (1) (2) (3)
Other expenses (95) - (95) - - -
Return on ordinary activities
before tax
6 (8) (2) - (2) (2)
Tax on ordinary activities (7) 7 - - - -
Return attributable to equity shareholders (1) (1) (2) - (2) (2)

RECONCILIATION OF MOVEMENTS IN SHAREHOLDERS' FUNDS
for the year ended 31 March 2013

20132012
Ordinary Shares'D' Shares'E' SharesTotalOrdinary Shares'D' Shares'E' SharesTotal
 £'000£'000£'000£'000£'000£'000£'000£'000
 
Opening Shareholders' funds   9,795 2,177 3,515 15,487 12,121 2,624 - 14,745
Issue of shares   - - 3,212 3,212 33 - 2,549 2,582
Unallotted shares   181 - (1,108) (927) - - 1,108 1,108
Share issue costs   - - (177) (177) (2) - (140) (142)
Purchase of own shares   (305) (14) (10) (329) (312) (44) - (356)
Total recognised gains/ (losses) for the year   734 - (2) 732 (1,476) (262) (2) (1,740)
Dividends paid   (591) (667) (288) (1,546) (569) (141) - (710)
'D' share conversion   1,496 (1,496) - - - - - -
 
Closing Shareholders' funds   11,310 - 5,142 16,452 9,795 2,177 3,515 15,487

BALANCE SHEET
as at 31 March 2013

20132012
Ordinary Shares'E' SharesTotalOrdinary Shares'D' Shares'E' SharesTotal
 £'000£'000£'000£'000£'000£'000£'000
Fixed assets 
Investments   11,065 3,390 14,455 8,514 1,351 - 9,865
 
Current assets 
Debtors   104 30 134 565 108 - 673
Cash at bank and in hand   320 1,796 2,116 825 767 3,518 5,110
  424 1,826 2,250 1,390 875 3,518 5,783
Creditors: amounts falling due within one year   (179) (74) (253) (109) (49) (3) (161)
 
Net current assets  245 1,752 1,997 1,281 826 3,515 5,622
 
Net assets  11,310 5,142 16,452 9,795 2,177 3,515 15,487
 

Capital and reserves

 
Called up share capital   377 57 434 112 278 25 415
Capital redemption reserve   3,857 - 3,857 3,612 6 - 3,618
Share premium account   1,971 5,387 7,358 1,971 - 2,384 4,355
Share capital to be issued   181 - 181 - - 1,108 1,108
Special reserve   3,493 - 3,493 2,878 2,075 - 4,953
Capital reserve - realised   1,145 (346) 799 2,392 3 (2) 2,393
Capital reserve - unrealised   603 55 658 (782) (151) - (933)
Revenue reserve   (317) (11) (328) (388) (34) - (422)
 
Total equity shareholders' funds  11,310 5,142 16,452 9,795 2,177 3,515 15,487
 
Basic and diluted net asset
 value per share
  89.5p 89.4p 87.0p 78.4p 94.4p

CASH FLOW STATEMENT
for the year ended 31 March 2013

20132012
Ordinary Shares'D' Shares'E' SharesTotalOrdinary Shares'D' Shares'E' SharesTotal
 £'000£'000£'000£'000£'000£'000£'000£'000
 
Net cash inflow/(outflow) from operating activities  137 - (26) 111 (91) (20) 1 (110)
 
Capital expenditure  
Purchase of investments   (1,436) - (3,903) (5,339) (1,962) (230) - (2,192)
Disposal of investments   1,406 - 568 1,974 2,173 923 - 3,096
Net cash (outflow)/inflow
from capital expenditure
  (30) - (3,335) (3,365) 211 693 - 904
 
Acquisitions 
Acquisition costs   - - - - (7) - - (7)
Net cash outflow
from acquisitions
  - - - - (7) - - (7)
 
Equity dividends paid  (593) (667) (288) (1,548) (570) (141) - (711)
 
Net cash (outflow)/inflow
before financing
  (486) (667) (3,649) (4,802) (457) 532 1 76
 
Financing  
Proceeds of share issue   - - 3,161 3,161 26 - 2,480 2,506
Unallotted share issue proceeds   181 - (1,108) (927) - - 1,108 1,108
Share issue costs   - - (126) (126) (6) - (71) (77)
Purchase of own shares   (286) (14) - (300) (307) (33) - (340)
Net cash (outflow)/inflow
from financing
  (105) (14) 1,927 1,808 (287) (33) 3,517 3,197
 
(Decrease)/increase in cash  (591) (681) (1,722) (2,994) (744) 499 3,518 3,273

NOTES TO THE ACCOUNTS  
for the year ended 31 March 2013

1. Accounting policies

Basis of accounting
The Company has prepared its financial statements under UK Generally Accepted Accounting Practice and in accordance with the Statement of Recommended Practice "Financial Statements of Investment Trust Companies and Venture Capital Trusts" January 2009 ("SORP").

The financial statements are prepared under the historical cost convention except for the revaluation of certain financial instruments.

The Company implements new Financial Reporting Standards issued by the Accounting Standards Board when required.

Presentation of income statement
In order to better reflect the activities of a Venture Capital Trust and in accordance with guidance issued by the Association of Investment Companies ("AIC"), supplementary information which analyses the income statement between items of a revenue and capital nature has been presented alongside the income statement. The net revenue is the measure the Directors believe appropriate in assessing the Company's compliance with certain requirements set out in Part 6 of the Income Tax Act 2007.

Investments
Venture capital investments are designated as "fair value through profit or loss" assets due to investments being managed and performance evaluated on a fair value basis. A financial asset is designated within this category if it is both acquired and managed on a fair value basis, with a view to selling after a period of time, in accordance with the Company's documented investment policy. The fair value of an investment upon acquisition is deemed to be cost. Thereafter, investments are measured at fair value in accordance with the International Private Equity and Venture Capital Valuation Guidelines ("IPEV") together with FRS 26.

Investments quoted on recognised stock markets are measured using bid prices.

The valuation methodologies for unlisted instruments used by the IPEV to ascertain the fair value of an investment are as follows:

*        Price of recent investment;
*        Multiples;
*        Net assets;
*        Discounted cash flows or earnings (of the underlying business);
*        Discounted cash flows (from the investment); and
*        Industry valuation benchmarks.

The methodology applied takes account of the nature, facts and circumstances of the individual investment and uses reasonable data, market inputs, assumptions and estimates in order to ascertain fair value.

Where an investee company has gone into receivership, liquidation, or administration where there is little likelihood of a recovery, the loss on the investment, although not physically disposed of, is treated as being realised.

Gains and losses arising from changes in fair value are included in the income statement as a capital item.

It is not the Company's policy to exercise either significant or controlling influence over investee companies. Therefore, the results of these companies are not incorporated into the revenue account except to the extent of any income accrued. This is in accordance with the SORP that does not require portfolio investments to be accounted for using the equity method of accounting.

In respect of disclosures required by the SORP for the 10 largest investments held by the Company, the most recent publicly available accounts information, either as filed at Companies House, or announced to the London Stock Exchange, is disclosed. In the case of unlisted investments, this may be abbreviated information only.

Income
Dividend income from investments is recognised when the shareholders' rights to receive payment has been established, normally the ex-dividend date.

Interest income is accrued on a time apportioned basis, by reference to the principal outstanding and at the effective interest rate applicable and only where there is reasonable certainty of collection.

Expenses
All expenses are accounted for on an accruals basis. In respect of the analysis between revenue and capital items presented within the income statement, all expenses have been presented as revenue items except as follows:

*        Expenses which are incidental to the acquisition of an investment are deducted from the Capital Account.
*        Expenses which are incidental to the disposal of an investment are deducted from the disposal proceeds of the investment.
*        Expenses are split and presented partly as capital items where a connection with the maintenance or enhancement of the value of the investments held can be demonstrated and accordingly the investment management fee and finance costs have been allocated 25% to revenue and 75% to capital, in order to reflect the Directors' expected long-term view of the nature of the investment returns of the Company.

Taxation
The tax effects on different items in the Income Statement are allocated between capital and revenue on the same basis as the particular item to which they relate using the Company's effective rate of tax for the accounting period.

Due to the Company's status as a Venture Capital Trust and the continued intention to meet the conditions required to comply with Part 6 of the Income Tax Act 2007, no provision for taxation is required in respect of any realised or unrealised appreciation of the Company's investments.

Deferred taxation is not discounted and is provided in full on timing differences that result in an obligation at the balance sheet date to pay more tax, or a right to pay less tax, at a future date, at rates expected to apply when the obligations or rights crystallise based on tax rates and law enacted or substantively enacted at the balance sheet date. Timing differences arise from the inclusion of items of income and expenditure in taxation computations in periods different from those in which they are included in the accounts. Deferred tax assets are only recognised if it is expected that future taxable profits will be available to utilise such assets and are recognised on a non-discounted basis.

Other debtors and other creditors
Other debtors (including accrued income) and other creditors are included within the accounts at amortised cost.

Share issue costs
Share issue costs have been deducted from the share premium account.

Segmental reporting
The Company only has one class of business and one market.

2. Basic and diluted return per share

Weighted average
number of shares
in issue
Revenue
return/
(loss)
Capital
gain/(loss)
£'000£'000
Basic and diluted return per share is based on:
Year ended 31 March 2013 Ordinary Shares 11,999,132 161 573
'E' Shares 5,472,928 (1) (1)
160 572
Year ended 31 March 2012 Ordinary Shares 11,452,527 145 (1,621)
'D' Shares 2,812,527 2 (264)
'E' Shares 2,007,202 - (2)
147 (1,887)

As the Company has not issued any convertible securities or share options, there is no dilutive effect on return per share class in issue. The return per share disclosed therefore represents both basic and diluted return per share class in issue.

3. Basic and diluted net asset value per share

Shares in issueNet assetsNAV
per share
£'000Pence
Year ended 31 March 2013 Ordinary Shares 12,436,875 11,129 89.5
'D' Shares - - -
'E' Shares 5,750,336 5,142 89.4
Share capital to be issued 181
16,452
Year ended 31 March 2012 Ordinary Shares 11,251,978 9,795 87.0
'D' Shares 2,777,944 2,177 78.4
'E' Shares 2,549,793 2,407 94.4
Share capital to be issued 1,108
15,487

As the Company has not issued any convertible securities or share options, there is no dilutive effect on net asset value per class of share in issue. The net asset value per share disclosed therefore represents both basic and diluted net asset value per class of share in issue.

4. Financial Instruments

The Company's investment activities expose the Company to a number of risks associated with financial instruments and the sectors in which the Company invests. The principal financial risks arising from the Company's operations are:

*        Investment risks;
*        Credit risk; and
*        Liquidity risk.

The Board regularly reviews these risks and the policies in place for managing them. There have been no significant changes to the nature of the risks that the Company is exposed to over the year and there have also been no significant changes to the policies for managing those risks during the year.

The risk management policies used by the Company in respect of the principal financial risks and a review of the financial instruments held at the year end are provided below:

As a VCT, the Company is exposed to investment risk in the form of potential losses and gains that may arise on the investments it holds in accordance with its investment policy. The management of investment risk is a fundamental part of the investment activities undertaken by the Manager and overseen by the Board. The Manager monitors investments through regular contact with management of investee companies, regular review of management accounts and other financial information and attendance at investee company board meetings. This enables the Manager to manage the investment risk in respect of individual investments. Investment risk is also mitigated by holding a diversified portfolio spread across various business sectors and asset classes.

The elements of investment risk to which the Company is exposed are:

*        Investment price risk; and
*        Interest rate risk.

The Company has undertaken sensitivity analysis on its financial instruments, split into the relevant component parts, taking into consideration the economic climate at the time of review in order to ascertain the appropriate risk allocation.

Investment price risk
Investment price risk arises from uncertainty about the future prices and valuations of financial instruments held in accordance with the Company's investment objectives. It represents the potential loss that the Company might suffer through market price movements in respect of quoted investments and also changes in the fair value of unquoted investments that it holds.

Interest rate risk
The Company accepts exposure to interest rate risk on floating-rate financial assets through the effect of changes in prevailing interest rates. The Company receives interest on its cash deposits at a rate agreed with its bankers. Investments in loan stock and fixed interest investments attract interest predominately at fixed rates. A summary of the interest rate profile of the Company's investments is shown below.

Interest rate profile of financial assets and financial liabilities
There are three levels of interest which are attributable to the financial instruments as follows:
*        "Fixed rate" assets represent investments with predetermined yield targets and comprise loan note investments.
*        "Floating rate" assets predominantly bear interest at rates linked to the Bank of England base rate and comprise cash at bank.
*        "No interest rate" assets do not attract interest and comprise equity investments, hedge funds, non-interest bearing convertible loan notes, loans and receivables (excluding cash at bank) and other financial liabilities.

The Company monitors the level of income received from fixed, floating and non-interest rate assets and, if appropriate, may make adjustments to the allocation between the categories, in particular should this be required to ensure compliance with the VCT regulations.

Credit risk
Credit risk is the risk that a counterparty to a financial instrument is unable to discharge a commitment to the Company made under that instrument. The Company is exposed to credit risk through its holdings of loan stock in investee companies, investments in liquidity funds, cash deposits and debtors.

The Manager manages credit risk in respect of loan notes with a similar approach as described under investment risks above. In addition the credit risk is partially mitigated by registering floating charges over the assets of certain investee companies. The strength of this security in each case is dependent on the nature of the investee company's business and its identifiable assets. The level of security is a key means of managing credit risk. Similarly, the management of credit risk associated interest, dividends and other receivables is covered within the investment management procedures.

Cash is mainly held at Royal Bank of Scotland plc, with a balance also maintained at Bank of Scotland plc, both of which are A-rated financial institutions and ultimately part-owned by the UK Government. Consequently, the Directors consider that the risk profile associated with cash deposits is low.

There have been no changes in fair value during the year that can be directly attributable to changes in credit risk.

Liquidity risk
Liquidity risk is the risk that the Company encounters difficulties in meeting obligations associated with its financial liabilities. Liquidity risk may also arise from either the inability to sell financial instruments when required at their fair values or from the inability to generate cash inflows as required. The Company only normally ever has a relatively low level of creditors (2013: £253,000, 2012: £161,000) and has no borrowings. Also most quoted investments held by the Company are considered to be readily realisable. The Company always holds sufficient levels of funds as cash and readily realisable investments in order to meet expenses and other cash outflows as they arise. For these reasons the Board believes that the Company's exposure to liquidity risk is minimal.

The Company's liquidity risk is managed by the Manager in line with guidance agreed with the Board and is reviewed by the Board at regular intervals.

5.  Post balance sheet event
On 15 February 2013, the Company published an Offer Document in respect of (i) a Tender Offer and Substitute Share Offer, together the Share Realisation and Reinvestment Programme ("SRRP"), for existing shareholders and (ii) a Top-up Offer to issue up to 1,252,593 additional Ordinary Shares.

On 4 April 2013 and 11 April 2013 the following transactions took place under the SRRP:

*        A total of 2,151,470 Ordinary Shares were purchased for cancellation at a price of 87.9p per Ordinary Share.
*        A total of 2,086,669 Ordinary Shares were allotted in respect of the proceeds of the shares tendered for cancellation at a price of approximately 90.6p per Ordinary Share.

On 4 April 2013 and 11 April 2013, 198,907 Ordinary shares were allotted at a price of approximately 90.6p per Ordinary Share as a result of new subscriptions under the Top-up Offer.

ANNOUNCEMENT BASED ON AUDITED ACCOUNTS
The financial information set out in this announcement does not constitute the Company's statutory financial statements in accordance with section 434 Companies Act 2006 for the year ended 31 March 2013, but has been extracted from the statutory financial statements for the year ended 31 March 2013 which were approved by the Board of Directors on 24 July 2013 and will be delivered to the Registrar of Companies. The Independent Auditor's Report on those financial statements was unqualified and did not contain any emphasis of matter nor statements under s 498(2) and (3) of the Companies Act 2006.

The statutory accounts for the year ended 31 March 2012 have been delivered to  the Registrar of Companies and received an Independent Auditors report which was  unqualified and did not contain any emphasis of matter nor statements under s 498(2) and (3) of the Companies Act 2006.

A copy of the full annual report and financial statements for the year ended 31 March 2013 will be printed and posted to shareholders shortly. Copies will also be available to the public at the registered office of the Company at 10 Lower Grosvenor Place, London SW1W 0EN and will be available for download from www.downing.co.uk




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(i) the releases contained herein are protected by copyright and other applicable laws; and
(ii) they are solely responsible for the content, accuracy and originality of the
information contained therein.

Source: Downing Income VCT 3 plc via Thomson Reuters ONE

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